When working with new clients, many times they resist going through the data-gathering and initial cash-flow planning endeavor. Their resistance usually stems from the belief that we are investment advisors only, and therefore, investment plans should be the primary focus. In other words, “Here’s my statement, tell me what you can do.” With some gentle prodding, we politely push the client to go through this initial process.
First, we need to dive deeper into why clients may be resistant to conducting a cash-flow analysis. For one, clients often think the process will be time consuming and tedious. Most importantly, though, clients struggle to see the bigger picture and are solely focused on getting straight to investing. They fail to see the crucial connection between the cash-flow planning process and investment. We recommend they think about it like a trip to the doctor’s office when they’re feeling sick. They wouldn’t walk in and say, “Can you skip the exam and get right to the treatment?” They need to evaluate the full picture before determining a course of treatment.
On one occasion, we ran a cash-flow projection for a client with an initial rate of return (ROR) of 3%, and the projection revealed the client ran out of assets in his mid-70s. The client’s initial reaction was, “Of course the assets ran out. You have to be able to do better than 3%!” In response, we revised the cash-flow analysis with an 8% ROR, revealing the client made it to his late 70s before depleting his assets. The client was obviously confused and did not understand how that could be the case. The point of this example is to demonstrate that ROR does not always play a large role in the overall success of the financial cash-flow projection. The client’s problem was not ROR. It was one of any number of reasons, including, not saving enough, retiring too early or spending too much in retirement.
Wants vs. Needs
Cash-flow analysis allows us to focus on what the client truly needs, which in this case is planning directed towards cash flow concerns and secondarily, rate of return. This process allows us to determine wants versus needs, particularly when it comes to ROR. We use cash flow projections to build an investment plan around the necessary rate of return. Many people know the rate of return they want but don’t understand the rate of return they need to meet financial goals in the future. After we determine a client’s ROR needs and develop an investment plan targeted to meet that ROR over the long term, we’re in a much better position to start addressing what he or she may desire as a ROR instead of what is needed.
A cash-flow projection is crucial to starting the financial planning process, as it can also help us to identify and prioritize future financial planning projects. This may include savings needs for retirement, college expense needs, appropriate retirement dates, retirement spending, projected estate valuations, projected real estate and other asset liquidation events, elder care planning concerns, and more. One can see there are many uses for a cash flow projection other than determining investment ROR need.
Consider this example. A client came into our office to discuss creating an estate plan. Upon running a cash-flow analysis, we discovered he would run out of money well before he turned 80. Therefore, he wasn’t in the position to be discussing estate planning. Cash-flow analysis ultimately saves you and your client time because it allows you to determine what they need before going down the planning route.
Educate Clients
Advisors also need to take the time to explain to clients what to expect beyond investment plans. For true financial planners, all roads don’t lead to insurance products or investments – but clients may not realize that. Financial planners need to explain that they’re willing and able to use all different financial planning tools at their disposal. Financial planners should let clients know that they think of themselves as a “quarterback,” coordinating the efforts of multiple specialists across the investment, legal, insurance and asset protection fields.
It may take clients a while to grasp all their financial planner can do for them, from cash-flow planning and beyond. Many successful planners have realized that giving their time to help a client or referral source with a financial planning need, free of charge, can yield far greater returns in the long run.
Becoming a planning resource for referral sources can put a planner in a very strong position. The result can be an ever-growing roster of potential clients and a much more rewarding experience. This type of practice takes many years to develop and requires planners to constantly hone their craft. We believe the financial planning industry is constantly evolving and detailed holistic advice will never be a commodity. When a family is in need, and financial planning is a part of the solution, there is only so much that a “1-800” number can provide – relationships matter as much as cash flow.
Robert Conzo is the CEO and Managing Director of The Wealth Alliance, a registered investment advisory firm with offices in Melville, NY and Boca Raton, FL. As a CFP and former CPA, Rob focuses his practice on retirement planning, investment planning, elder care planning, as well as business succession planning, debt restructuring and insurance planning. He can be reached at rconzo@thewealthalliance.com or 631-670-0701.
